UPDATE 3-US natgas futures end down 2 pct, storage weighs
* Record high production, inventories weigh on prices * Cooler forecast, technical buying limit downside * Southern heat also stirs some demand * Coming Up: EIA, Enerdata natgas storage data Thursday (Releads, adds quote, weather details, closing prices) By Joe Silha NEW YORK, April 4 (Reuters) - U.S. natural gas futures ended lower on Wednesday, nearly wiping out gains scored earlier in the week as expectations for a bearish inventory build on Thursday outweighed extended forecasts for cooler weather that should boost demand. Gas prices slid nearly 7 percent last week, the biggest weekly loss in two months, on pressure from moderate weather and bearish data on inventories, production and drilling. But the cooler outlook for later this week and next week helped drive prices up nearly 3 percent in the previous two sessions. Front-month gas futures on the New York Mercantile Exchange on Wednesday finished down 4.6 cents, or 2.1 percent, at $2.141 per million British thermal units after trading in a fairly narrow range between $2.137 and $2.198. The nearby contract, which tumbled 19 percent in March in its biggest monthly drop since August 2010, dipped to a 10-year low of $2.069 on Monday. "My overall view remains biased to the bearish side. The surplus is still building in inventory versus both last year and the five year average and is going to get harder and harder to work off," Energy Management Institute's Dominick Chirichella said, adding he does not expect a sustained trend change soon. Spreads to winter remained at their widest in at least two years, with the December premium to May gaining 1.8 cents to $1.089. That spread has spiked 46 percent over the last month as mild spring weather slowed demand and pressured prompt prices. Chart traders said the market was still oversold and due for a technical bounce, particularly with a long holiday weekend ahead. But few expected much upside, with storage and production at record highs and mild spring weather likely to dampen demand. NYMEX electronic and floor trading will be closed on Friday for the Good Friday holiday. AccuWeather.com expects temperatures in the Northeast to average above normal for the next five days, then cool to slightly below normal by early next week. The Midwest looks cooler, with mostly below seasonal readings expected for the next week or so. Traders also noted some very warm temperatures in Texas and across the South this week have stirred some cooling demand. RECORD STORAGE, THE BIGGEST PROBLEM FOR PRICES Utilities typically build inventories from April through October to help meet peak winter heating needs, but this year storage injections have started a couple of weeks early. With stocks already at record highs for this time, storage could turn out to be the biggest problem for prices this year. Last week's Energy Information Administration report showed gas inventories rose for a second week, climbing to 2.437 trillion cubic feet, more than 50 percent above last year's levels and nearly 60 percent above the five-year average. (Storage graphic: link.reuters.com/mup44s ) EIA storage data on Thursday is expected to show gas inventories rose last week by 34 billion cubic feet, according to a Reuters poll of traders and analysts on Wednesday. Stocks dropped an adjusted 29 bcf during the same week last year, while the five-year average build for that week is 8 bcf. Storage is set to finish March at near 2.5 tcf, about 60 percent, or a whopping 950 bcf, above normal and easily above the previous March 31 record of 2.148 tcf from 1983. The inventory overhang could drive prices lower this spring as seasonal weather demand fades, then pressure prices again later in the injection season if storage caverns fill to capacity and force more gas into a well-supplied market. PRODUCTION, NOT SLOWING MUCH YET The fairly steady drop in dry gas drilling this year -- the gas rig count is down nearly 30 percent since peaking at 936 in mid-October -- had stirred expectations that low prices would finally force producers to curb gas output and tighten supplies. The gas-directed rig count hit a 10-year low of 652 just two weeks ago, according to Baker Hughes data. (Rig graphic: r.reuters.com/dyb62s ) But the drop has yet to be reflected in pipeline flows, which are still estimated to be at or near record highs, primarily due to rising output from shale. Horizontal rigs, the type most often used to extract oil or gas from shale, are still hovering near all-time highs. While the share of horizontals drilling for dry gas has fallen to 38 percent from 78 percent just two years ago, analysts said any slowdown in gas production could take a lot more time. They noted that the shift to higher-value oil and liquids-rich wells still produces plenty of associated gas that ends up in the market after processing. U.S. Energy Information Administration production data last week offered little hope for bulls, with January gross gas output climbing to a record of 72.85 bcf per day, eclipsing the previous peak of 72.68 bcfd in November. Some analysts say the gas-directed rig count may have to drop below 600 to reduce flowing supplies significantly. Most analysts do not expect any major slowdown in gas output until later this year. (Reporting By Joe Silha; Editing by David Gregorio and Alden Bentley)
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